Chapter 8 Aggregate Planning in a Supply Chain

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Chapter 8Aggregate Planningin a Supply Chain
Supply Chain Management
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Outline

• Role of aggregate planning in a supply chain
• The aggregate planning problem
• Aggregate planning strategies
• Implementing aggregate planning in practice

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Role of Aggregate Planning in a Supply Chain

• Capacity has a cost, lead times are greater than
  zero
• Aggregate planning
• process by which a company determines levels of
  capacity, production, subcontracting, inventory,
  stockouts, and pricing over a specified time
  horizon
• goal is to maximize profit
• decisions made at a product family (not SKU)
  level
• time frame of 3 to 18 months
• how can a firm best use the facilities it has?

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Role of Aggregate Planning in a Supply Chain

• Specify operational parameters over the time
  horizon
• production rate
• workforce
• overtime
• machine capacity level
• subcontracting
• backlog
• inventory on hand
• All supply chain stages should work together on
  an aggregate plan that will optimize supply chain
  performance

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The Aggregate Planning Problem

• Given the demand forecast for each period in the
  planning horizon, determine the production level,
  inventory level, and the capacity level for each
  period that maximizes the firms (supply chains)
  profit over the planning horizon
• Specify the planning horizon (typically 3-18
  months)
• Specify the duration of each period
• Specify key information required to develop an
  aggregate plan

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Information Needed foran Aggregate Plan

• Demand forecast in each period (deterministic)
• Production costs
• labor costs, regular time (/hr) and overtime
  (/hr)
• subcontracting costs (/hr or /unit)
• cost of changing capacity hiring or layoff
  (/worker) and cost of adding or reducing machine
  capacity (/machine)
• Labor/machine hours required per unit
• Inventory holding cost (/unit/period)
• Stockout or backlog cost (/unit/period)
• Constraints limits on overtime, layoffs, capital
  available, stockouts and backlogs

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Outputs of Aggregate Plan

• Production quantity from regular time, overtime,
  and subcontracted time used to determine number
  of workers and supplier purchase levels
• Inventory held used to determine how much
  warehouse space and working capital is needed
• Backlog/stockout quantity used to determine what
  customer service levels will be
• Workforce hired/laid off used to determine any
  labor issues that will be encountered
• Machine capacity increase/decrease used to
  determine if new production equipment needs to be
  purchased
• A poor aggregate plan can result in lost sales,
  lost profits, excess inventory, or excess capacity

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Aggregate Planning Strategies

• Trade-offs available to a planner are between
  labor and machine capacity, inventory,
  backlog/lost sales
• Chase strategy synchronize production rate with
  demand rate.
• Time flexibility strategy vary amounts of
  overtime and hours worked in order to synchronize
  production and demand rates.
• Level strategy keep stable machine
  usage/capacity and labor force and meet demand
  with inventory
• Mixed strategy a combination of one or more of
  the first three strategies

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Chase Strategy(?????????)

• Production rate is synchronized with demand by
  varying machine capacity or hiring and laying off
  workers as the demand rate varies
• However, in practice, it is often difficult to
  vary capacity and workforce on short notice
• Expensive if cost of varying capacity is high
• Negative effect on workforce morale
• Results in low levels of inventory
• Useful when inventory holding costs are high and
  costs of changing capacity are low

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Time Flexibility Strategy(?????????,???????)

• Can be used if there is excess machine capacity
• Workforce is kept stable, but the number of hours
  worked is varied over time to synchronize
  production and demand
• Can use overtime or a flexible work schedule
• Requires flexible workforce, but avoids morale
  problems of the chase strategy
• Low levels of inventory, lower utilization
• Should be used when inventory holding costs are
  high and capacity is relatively inexpensive

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Level Strategy(?????????????????)

• Maintain stable machine capacity and workforce
  levels with a constant output rate
• Shortages and surpluses result in fluctuations in
  inventory levels over time
• Inventories that are built up in anticipation of
  future demand or backlogs are carried over from
  high to low demand periods
• Better for worker morale
• Large inventories and backlogs may accumulate
• Should be used when inventory holding and backlog
  costs are relatively low

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Red Tomato Tools

• A gardening tool manufacturer
• Product highly seasonal, peaking in the spring
• How to use aggregate planning to deal with
  seasonal demand and still make a profit?
• Options
• Adding workers during the busy season
• Subcontracting out some of the work
• Building up inventory during the slow months
• Building up a backlog of orders to be delivered
  late

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Demand Forecast at Red Tomato Tools
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Aggregate Planning
Working/each day 8 Working days/month
20 No employee can work more than 10 hours of
overtime/month
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Aggregate Planning (Define Decision Variables)

• Wt Workforce size for month t, t 1, ..., 6
• Ht Number of employees hired at the beginning
  of month t, t 1, ..., 6
• Lt Number of employees laid off at the
  beginning of month t, t 1, ..., 6
• Pt Production in month t, t 1, ..., 6
• It Inventory at the end of month t, t 1, ...,
  6
• St Number of units outstocked out at the end of
  month t, t 1, ..., 6
• Ct Number of units subcontracted for month t, t
  1, ..., 6
• Ot Number of overtime hours worked in month t,
  t 1, ..., 6

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Objective Function
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Workforce Constraints

• Workforce size for each month is based on hiring
  and layoffs

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Capacity Constraints

• Production for each month cannot exceed capacity

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Inventory Balance Constraints

• Inventory balance for each month

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Overtime Constraints

• No employee can work more than 10 hours of
  overtime/month

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Aggregate Planning in Practice

• Think beyond the enterprise to the entire supply
  chain
• Make plans flexible because forecasts are always
  wrong
• Rerun the aggregate plan as new information
  emerges
• Use aggregate planning as capacity utilization
  increases

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Summary of Learning Objectives

• What types of decisions are best solved by
  aggregate planning?
• What is the importance of aggregate planning as a
  supply chain activity?
• What kinds of information are needed to produce
  an aggregate plan?
• What are the basic trade-offs a manager makes to
  produce an aggregate plan?
• How are aggregate planning problems formulated
  and solved using Microsoft Excel?

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Table 8.4 Demand Forecast with Higher Seasonal
Fluctuation